Global Tax Alert | 17 January 2014
Updated 2013 US IRC Section 1256 qualified board or exchange list
Generally, a taxpayer must mark to market transactions qualifying as Section 1256 contracts at the end of each tax year as if such transactions were sold for fair market value.1 Subject to certain exceptions, any gain or loss on a Section 1256 contract is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of how long the taxpayer actually held the contract.2
Section 1256 contracts include (among other things) regulated futures contracts and non-equity options.3 A regulated futures contract is a contract that: (i) is marked to market on a daily basis to determine the amount that the taxpayer must deposit to its margin account to cover losses, or the amount that it may withdraw from such account as a result of price changes during the day, and (ii) is traded on or subject to the rules of a qualified board or exchange.4 A non-equity option is an option (other than an equity option) that is traded on or subject to the rules of a qualified board or exchange.5 A “qualified board or exchange” means: (i) a national securities exchange (ii) a domestic board of trade, or (ii) any other exchange, board of trade, or other market that the Secretary determines has rules adequate to carry out the purposes of Section 1256.6
Qualified Board or Exchange
Section 1256(g)(7) defines a qualified board or exchange (QBE) as (1) a national securities exchange which is registered with the Securities and Exchange Commission, (2) a domestic board of trade designated as a contract market by the Commodities Futures Trading Commission or (3) any other market which the Secretary determines has rules adequate to carry out the purposes of the section. Below is a list of exchanges and boards that qualify as QBEs pursuant to Section 1256(g)(7).
A “national securities exchange” is a securities exchange that has registered with the SEC under Section 6 of the Securities Exchange Act of 1934. Below are the securities exchanges registered with the SEC under Section 6(a) of the Exchange Act as national securities exchanges:
- • NYSE MKT LLC (formerly NYSE AMEX and the American Stock Exchange merged with ICE at the end of 2013)
- • BATS Exchange, Inc.
- • BATS Y-Exchange, Inc.
- • BOX Options Exchange LLC
- • NASDAQ OMX BX, Inc. (formerly the Boston Stock Exchange)
- • C2 Options Exchange, Incorporated
- • Chicago Board Options Exchange, Incorporated
- • Chicago Stock Exchange, Inc.
- • EDGA Exchange, Inc.
- • EDGX Exchange, Inc.
- • International Securities Exchange, LLC
- • The Nasdaq Stock Market LLC
- • National Stock Exchange, Inc.
- • New York Stock Exchange LLC
- • NYSE Arca, Inc.
- • NASDAQ OMX PHLX, Inc. (formerly Philadelphia Stock Exchange)
Certain exchanges are also registered with the SEC through a notice filing under Section 6(g) of the Exchange Act for the purpose of trading security futures. These exchanges also qualify as qualified boards or exchanges for purposes of Section 1256.
- • Board of Trade of the City of Chicago, Inc.
- • Chicago Mercantile Exchange
- • One Chicago, LLC
- • The Island Futures Exchange, LLC (inactive)
- • NQLX LLC (inactive)
The domestic boards of trade designated as contract markets by the Commodity Futures Trading Commission (CFTC) are as follows:
- • Cantor Futures Exchange, L.P.
- • CBOE Futures Exchange
- • Chicago Board of Trade
- • Chicago Climate Futures Exchange, LLC
- • Chicago Mercantile Exchange
- • Commodity Exchange, Inc.
- • ELX Futures, L.P.
- • ERIS Exchange, LLC.
- • Green Exchange, LLC
- • ICE Futures U.S., Inc.
- • Kansas City Board of Trade
- • Minneapolis Grain Exchange
- • NASDAQ OMX Futures Exchange, Inc.
- • NYSE Liffe US, LLC
- • Nodal Exchange, LLC
- • North American Derivative Exchange, Inc – formerly listed as HedgeStreet Inc.
- • New York Mercantile Exchange
- • One Chicago LLC Futures Exchange
- • The Trend Exchange, Inc.
- • TrueEX LLC.
Pursuant to Section 1256(g)(7)(C), Treasury has also determined that the following exchanges have rules adequate to carry out the purposes of Section 1256.
- • International Futures Exchanges (Bermuda) Ltd.(inactive) (Rev. Rul. 85-72),
- • Mercantile Division of the Montreal Exchange (inactive) (Rev. Rul. 86-7),
- • Mutual Offset System – partnership between Chicago Mercantile Exchange and Singapore International Monetary Exchange Limited (Rev. Rul. 87-43),
- • ICE Futures (Rev. Rul. 2007-26),
- • Dubai Mercantile Exchange (Rev. Rul. 2009-04),
- • ICE Futures Canada (Rev. Rul. 2009-24),
- • LIFFE (Rev. Rul. 2010-3),
- • Eurex (Rev. Rul. 2013-5).
In September 2011 the Internal Revenue Service and Treasury Department released proposed regulations addressing the tax treatment of credit default swaps. The proposed regulations were issued under Section 1256(b)(2), which was part of the Dodd Frank Wall Street Reform and Consumer Protection Act (herein referred to as the Dodd-Frank Act). The Dodd- Frank Act amended Section 1256 to explicitly exclude (for tax years beginning after 21 July 2010), any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement from the definition of a Section 1256 contract. This amendment was designed to prevent cleared swaps from becoming subject to Section 1256.
The proposed regulations confirm that these types of swaps will not be considered Section 1256 contracts. However, the preamble to the regulations cross-references the Commodity Exchange Act (CEA), amendments to which may impact qualified boards or exchanges that have already been granted Section 1256 status through the revenue ruling process. Under the proposed regulations, it is possible that such boards and exchanges will have to resubmit to the CFTC for status as a designated contract market. If boards and exchanges are required to reapply to the CFTC for designated contract market status, the previously issued revenue rulings could be null and void. Thus, once a board or exchange receives designated contract market status, it could resubmit to the Internal Revenue Service for a revenue ruling to be treated as a Section 1256 qualified board or exchange. Ernst & Young, LLP will monitor the status of the proposed regulations. In the interim, clients are advised to continue marking contracts traded on the revenue ruling exchanges until final rules are promulgated.
This list is subject to change on an ongoing basis as new qualified board or exchanges are approved. Please note that this list may not immediately reflect such changes in the status of such qualified board or exchanges. Please contact the individuals listed below before adopting a position with respect to whether Section 1256 applies to a particular contract on a particular qualified board or exchange.
1. Section 1256(a)(1).
2. Section 1256(a)(1), (3).
4. Section 1256(g)(1).
5. Section 1256(g)(3).
6. Section 1256(g)(7).
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax Services/Capital Markets, Washington, DC
- • David Golden
+1 202 327 6526
- • Alan Munro
+1 202 327 7773
- • Liz Hale
+1 202 327 8070
Ernst & Young LLP, International Tax Services, San Francisco, CA
- • Joy Harper
+1 415 894 8000
EYG no. CM4114